Why do I need expensive title insurance?

Every time I buy a new home or refinance, I am shocked at how expensive title insurance is. I read that, because records are all electronic today, title insurance is a scam, a rip off, an unnecessary expense. Is there a way to avoid paying for it?

Dwayne, Fresno

Dear Dwayne,

Title insurance is a necessary evil. Yes, it can cost thousands, and most of us have never filed a claim or collected a dime on title policies (unlike medical or auto insurance). But things do go wrong with property ownership, and when there is a claim it's a biggie. That's why mortgage lenders still insist on title insurance to protect their collateral. You can avoid title insurance but only if you pay cash for the home. And I don't recommend that for several reasons.

Fraud can cost you your home.

A Texas builder sold properties that had undisclosed liens on them. The buyers found out when the creditors started foreclosure proceedings. Investors who paid cash (many did because it was a distress sale) will likely lose their entire investments.

Mortgage foreclosure procedures can be questionable.

A Massachusetts case involving loan transfers that weren't fully executed until after the foreclosure process had started (a fairly common practice) resulted in retroactive reversal of many foreclosures. The upshot is investors who bought foreclosure property may find they no longer own it. Without title insurance, the property reverts back to the previous owner and you lose your investment.

How does title insurance protect you?

First, title insurance employees run a title search, checking government records related to the property. However, the title search may not disclose clouds on your title (especially when there is fraud involved), so you get title insurance. Once a policy is issued, you are protected from deceitful developers and phony foreclosures.

Six things title insurance covers:

Undisclosed or missing heirs

Liens for unpaid taxes

Liens by contractors

Mistakes in examining records

Errors and omissions

Forgery

Why does title insurance cost more when you refinance?

In many markets, the seller pays the lion's share of the title insurance costs when you buy a home. When you refinance your mortgage, the charges are all yours. People refinancing for the first time are often shocked by the price of title insurance premiums.

Can you save money on title insurance?

Yes, you don't just have to go with the title insurance company your lender works with. You can shop around. Start with your current title insurer and then compare other insurers' rates.

In addition, you can save more with what is called a short-term, or reissue, rate if your home was bought or refinanced within five years. These discounted rates range from 5 percent to 60 percent of the standard insurance rate, depending on your state. Shorten the break-even period on a refinance by lowering your title insurance charges, or make a property purchase more affordable.